100. We raised these concerns with the Government.
The suggestion that there had been any change of policy was repudiated

There has been no change in the Government's
view of the appropriate use of ...OIELs as opposed to ... SIELs.
The Government has made it clear that OIELs will only be granted
for exporters with a proven track record of applications for SIELs
and /or where the particular nature of their business makes the
application of SIELs inappropriate. The Government will also take
into account the resources available to monitor the use of OIELs,
the nature and destination of the items concerned and whether
the exporter can comply with the requirements of an OIEL ... The
key question that the Government has to ask when it receives an
application for an OIEL is whether this type of application allows
the Government to make a proper assessment, against the Consolidated
EU and national export licensing criteria, of the exports proposed
under the licence.[163]

101. The statistics on the numbers of OIELs and
SIELs issued[164]
do not suggest to us that there is any obvious evidence of a change
in the application of the policy outlined by the Government. However,
we recommend that the Government should examine ways in which
more consolidated analytical information about OIELs (such as
destinations covered and equipments covered) might be presented
in the Annual Reports in order to allay any suspicions of abuse,
and to discourage any temptation to relax controls.

103. The Annual Report on Strategic Exports for 2000
recordsas have the three previous Annual Reportsthe
important role played by the UK Government in promoting multilateral
measures to control the problem of small arms and light weapons.
In particular, it sets out the UK Government's role in finalising
the UN Protocol against the Illicit Manufacturing of and Trafficking
in Firearms, their Parts, Components and Ammunition, and also,
in coordinating the OSCE's Document on Small Arms. Work at the
OSCE continues, with the focus now on information-sharing in preparation
for the eventual implementation of the measures agreed in Vienna
in November 2000.[168]
These agreements, along with complementary efforts by NATO, and
by the EU working with several African states, paved the way for
a major UN Conference on small arms and light weapons.

104. The United Nations Conference on the Illicit
Trade in Small Arms and Light Weapons took place from 9 to 20
July 2001 in New York. The Conference adopted a consensus programme
of action aimed at tackling the illegal trade in small arms, through
initiatives at the national, regional and global levels. It also
contains provisions on enhancing cooperation among states and
providing assistance to affected states, as well as review and
follow-up mechanisms. At the UN Conference, the UK Government
committed £19.5 million to efforts to curb small arms and
light weapons proliferation,[169]
funds that will be disbursed through UN agencies, regional organisations,
Governments and non-governmental organisations seeking to develop
and implement measures at all levels to combat small arms problems.[170]

105. We applaud the role played by the UK Government
in working towards international agreement on the control of small
arms. We welcome too, the inclusion in the Annual Report of details
of surplus arms destroyed by the Government, and information on
the number of small arms covered by standard individual licences
agreed in 2000 on a country by country basis. We remain concerned
however, that the UK Government's enthusiasm for small arms initiatives
at the regional and international level is not going to be fully
expressed in the provisions of the Export Control Act, making
it harder to monitor and control the production, trade, and end-use
of arms, including the small arms which contribute to conflict
and hamper sustainable development. We will re-examine the
issue of trafficking in small arms and light weapons when we come
to look at the draft proposals for subordinate legislation to
be made under the Export Control Act.

... the initiative [to] review inside the Department
whether the consolidated criteria were consistent with the obligation
in international law ...What I concluded, in the end, was that
the criteria themselves did not need amendment ... I think they
are pretty robust ... I believe there is no need to amend the
consolidated criteria for us to comply fully with the terms of
the UNSCR 1373 ...[172]

107. In their recent report on the FCO's annual report
on human rights, the Foreign Affairs Committee commented that
they were

... concerned that the Government should not
lose sight of the need to criticise and address human rights abuses
which take place in countries which are our allies in the international
coalition against terrorism, although we understand that in emergencies
there will be an earnest debate on where to find the balance between
security and liberty ...We are somewhat reassured by ... reassurances
[given by the FCO Minister of State, Mr Peter Hain] that the human
rights dialogue with Pakistan continues, and by his statement
to us that

we can have members of an international coalition
to fight a common threat of this awful kind whilst at the same
time having a full and frank dialogue including, where appropriate,
pressure with individual countries ... We are very conscious that
the human rights agenda must not be made subsidiary.

We are concerned nonetheless that in concentrating
on the need to build up a global alliance, the Government and
its allies may have let human rights in countries which are supporters
of the international coalition slip down their list of priorities.
We recommend that the Government ensure that the human rights
agenda is pursued with our allies in the war against terrorism
as vigorously now as before September 11.[173]

108. Of course, countries which are contributing
to the war on terrorism by taking action against terrorist organisations
within their borders need to be supported, possibly including
the provision of necessary military equipment. The Foreign Secretary's
view was that consistent application of the criteria was necessary
and that if a country's approach had changed, that would be reflected
in the assessment of a licence application against the criteria,
as in the example of Afghanistan itself. [174]

109. The reverse side of this is that al Qaeda and
other terrorist organisations must be prevented from obtaining
weapons or the raw materials to make them. As the Foreign Secretary
pointed out, the consolidated criteria already contain provisions
to address both these issues. Having reviewed them in the light
of last year's attacks on New York and Washington, the Government
decided that no amendments were necessary. Nonetheless, the Government's
supplementary memorandum says the case for reviewing the EU Code
in the light of 11 September is being examined. In particular,
the Foreign Secretary believed there was a greater need now for
international export control regimes (for example the EU Code)
to focus on non-state actors.[175]

110. The FCO wrote to the Clerk of the Committees
on 27 June giving the results of these deliberations.[176]
It reported that the the CFSP Working Group on Conventional Arms
Exports (COARM), which has oversight of the implementation of
the EU Code of Conduct, had had a brief informal discussion on
whether the Code should be amended in September 2001, in the immediate
aftermath of the terrorist attacks, and had concluded informally
that the Code was already sufficiently robust on the prevention
of arms flows to terrorists. Having argued that the Code was already
sufficiently clear in Criteria Six and Seven about the need to
prevent arms flows to terrorists, the letter went on to point
out that

The EU Code does not include the language in
the second consolidated criterion ... that HMG:

"considers that in some cases the use of
force by a Government within its own borders, for example to preserve
law and order against terrorists or other criminals, is legitimate
and does not constitute internal repression, as long as force
is used in accordance with the international human rights standards
described above"

We [HMG] have always taken the view that the inclusion
of this language in the Consolidated Criteria does not contradict
our obligations under the EU Code. It merely clarifies what is
arguably an obvious point: that the use of force is not internal
repression if it does not breach international human rights standards.
For example, criteria four (external aggression) and six (international
law) do not explicitly include text on the legitimate use of force.
Nevertheless, we believe it is consistent with these criteria
(and the EU Code) to view the use of force by a destination country
as legitimate, so long as it is not used aggressively against
another country or to assert by force a territorial claim, and
so long as force is used in accordance with that country's international
obligations and commitments, including under international humanitarian
law. The Foreign Secretary has therefore concluded that the EU
Code of Conduct does not need to be amended in response to the
terrorist attacks of September 11 or in order to be compliant
with UNSCR1373. The Code as currently drafted provides adequate
safeguards against the supply of arms and other controlled goods
to terrorists, while allowing Member States to equip those conducting
legitimate, responsible campaigns against terrorism.[177]

We do not demur from the Government's position that
it is on occasions legitimate for another government to use force
within its own borders to achieve security and defeat terrorism.
We nonetheless reiterate the warning by the Foreign Affairs Committee
of the need to remain alert to the threat of violations of human
rights. Such cases indicate the difficult decisions which confront
Ministers when different criteria have to be balanced against
each other. Great vigilance is required to ensure an appropriate
balance is maintained.

113. We accept that the Government is obliged
to continue to assess each SIEL application on its own merits
against the consolidated criteria and on a case-by-case basis.
However, the Government has acknowledged that the cumulative effects
of exports to a particular destination could be a relevant consideration
in this assessment. To aid our review process, we recommend that
the Government should consider including in its Annual Reports
data on the value and quantities of controlled goods for each
SIEL granted.

114. The cumulative effect of exports to a particular
destination will be a particularly relevant factor in considering
the application of Criterion Eight, the sustainable development
criterion. It is to this topic we now turn.

The compatibility of the arms exports with the
technical and economic capacity of the recipient country, taking
into account the desirability that states should achieve their
legitimate needs of security and defence with the least diversion
for armaments of human and economic resources

and goes on to say that

The Government will take account, in the light
of information from relevant sources such as United Nations Development
Programme, World Bank, IMF and Organisation for Economic Cooperation
and Development reports, whether the proposed export would seriously
undermine the economy or seriously hamper the sustainable development
of the recipient country. The Government will consider in this
context the recipient country's relative levels of military and
social expenditure, taking into account also any EU or bilateral
aid, and its public finances, balance of payments, external debt,
economic and social development and any IMF or World Bank-sponsored
economic reform programme.[180]

120. Tanzania has a population of 34 million, a per
capita income of $270 and, as of 2000, had a debt of $5.4 billion.[181]
It is classified by the Development Assistance Committee of the
OECD as a Least Developed Country. On the 27 November 2001, it
became the fourth country to qualify for debt relief under the
Heavily Indebted Poor Countries (HIPC) initiative, and was granted
relief from 54 percent of its debt.[182]
In 2000-2001 Tanzania received UK bilateral aid amounting to £69
million.[183] Criterion
Eight requires Ministers to ask whether the arguments for issuing
a licence permitting Tanzania to spend about £28 million
on an air traffic control system are outweighed by the argument
that the proposed export would seriously undermine the economy
or seriously hamper the sustainable development of the recipient
country when it has pressing development needs and has agreed
to channel scarce resources from debt relief and aid into basic
social services.

121. The Overseas Development Administrationthe
forerunner to the DfIDwas first aware of the proposed export
in 1992. In February 1993, a preliminary MoD F680 application
was made by BAE Systems.[184]
In July 1997 a second F680 application was made, and this was
approved in August 1997.[185]
In October 2000, the Secretary of State for International Development
was made aware of the formal licence application.[186]
In December 2001, the UK Government granted two licences for the
export of air traffic control equipment to Tanzania.[187]

122. While the three Secretaries of State who are
formally involved in the licensing decision concluded that the
proposed export did not breach Criterion Eight, it is clear that
the Secretary of State for International Development was not happy
with the decision. She commented in oral questions on 15 May

When it completed its debt-relief process, Tanzania
gave an undertaking to the World Bank board that it would review
the contract, but the Government of Tanzania came under pressure
to break that undertaking ... We do not give aid unconditionally
where there are bad procurement and bad contracts and so end up
using aid money to subsidise a bad contract that is damaging a
country.[188]

123. On the other hand, the Foreign Secretary told
us of the complex cost-benefit analyses conducted before he came
to a decision. We asked to see a summary of these calculations,
but were told that further consideration was being given to whether
this could be provided, in confidence, in a way which was consistent
with the Code of Practice on Open Government.[189]
We fail to see the relevance of the Code of Practice to the
provision of information in confidence to select committees
of this House. We expect to receive shortly the summary of the
cost-benefit analyses prepared within Government before the decision
on the application to export an air traffic control system to
Tanzania was

determined.

124. The Foreign Secretary also explained the efforts
to assess the suitability of the system for Tanzania's needs,
but stressed that these judgements were primarily matters for
the Tanzanian Government to decide upon.[190]
But if questions of value-for-money and the suitability of the
system were not apparently central to the UK's decision to grant
an export licence, they were considered by the World Bank with
the assistance of the International Civil Aviation Organisation.
In a letter of 8 November 2001, the International Civil Aviation
Organisation told the World Bank that the proposed export would
not be adequate for civil air traffic control purposes, and was
too expensive for Tanzania's needs, a £10 million system
being regarded as adequate (this figure was later revised downwards).
Prior to being approved by the World Bank for HIPC debt relief
on 27 November, Tanzania undertook to reconsider the suitability
and value for money of the proposed system.

125. The Foreign Secretary told us that the World
Bank's HIPC approval played an important role in the UK decision
to grant an export licence.[191]
It was emphasised that the licence is a permissive licence; it
allows the export to take place, but it does not commit Tanzania
to the purchase of the system. On 15 May, the Secretary of State
for International Development reiterated this point in the House
rather more emphatically

It is clear that Tanzania needs a civilian air
traffic control system to ensure safety in the country's air space.
The issue is whether the proposed system meets Tanzania's needs,
and represents value for money. The Government of Tanzania and
the World Bank await the report of the International Civil Aviation
Organisation on whether the BAE system best meets Tanzania's needs
... I hope that once we have the report from the International
Civil Aviation Organisation, and assuming that Tanzania responds
to it in the best way and in the interests of the country and
of poor people, we will be able to give it more help to solve
its problem.[192]

126. However, it is not at all clear why a decision
on the licence application was made on 21 December 2001, before
the results of the discussions between the Government of Tanzania,
the World Bank and the International Civil Aviation Organisation
on whether the BAE system best met Tanzania's needs were known.
The application had, after all, already been pending for upwards
of two years by then. Criterion Eight specifically requires the
Government to 'take account of' information from the World Bank
in considering the application of the criterion. There is no argument
that Tanzania does not need a modern air traffic control system,
but if the World Bank were to advise that the system chosen was
unnecessarily or imprudently expensive (as it appears subsequently
to have done), we would expect Ministers to take that view into
account in reaching a decision on the application of Criterion
Eight.

127. In defending his decision the Foreign Secretary,
in private session, laid great emphasis on the point that as a
legitimate government of a sovereign state, the Government of
Tanzania had the right to decide what air traffic control system
it bought from whom. But while the legitimate right to self-defence
is recognised in the criteria, sovereignty is nowhere mentioned
in them. When it comes to applying the sustainable development
criterion, we cannot accept as in any way decisive (or strictly
relevant) the argument that to have refused the application in
this case would have been an infringement of Tanzanian sovereignty.
The acceptance of such an argument as axiomatic would rule out
of court any attempt to apply Criterion Eight. The status of the
Tanzanian Government does not relieve Minister's of their obligation
to consider Criterion Eight, particularly (as the criterion's
terms make clear) where the proposed purchaser is a recipient
of bilateral aid. Development partnerships impose rights and obligations
on all the partners.

128. On 20 March 2002 it was reported that the DfID
was freezing £10 million of UK aid to Tanzania whilst it
re-assessed Tanzania's commitment to poverty reduction. Although
the Foreign Secretary argued[193]
that in making this decision the DfID was simply applying a different
set of criteria, and that this indicated neither approval or disapproval
of the contract between Tanzania and BAE Systems, we are not convinced
by this assertion. The Secretary of State for International Development
subsequently argued that the UK was

... the biggest provider of aid to [Tanzania],
and we have provided large funds this year. We are holding back
the £10 million so that we get a decent outcome once we have
the report from the International Civil Aviation Organisation
... We have said that we will hold back the £10 million and
that when we have the report and if we can get a good outcome
for Tanzania, we will assist Tanzania to take forward the process.[194]

On 3 July, in the course of an official visit to
Tanzania, it was announced by the Secretary of State that she
was recommencing the payment of aid to Tanzania following discussions
about the lessons of the process of letting the contract for the
air traffic control system.

129. While the argument over the Tanzania contract
clearly demonstrates that there are considerable differences within
Government over the interpretation of the sustainable development
criterion, we must recognise that assessments in terms of Criterion
Eight are about whether the proposed export has the potential
seriously to hamper sustainable development in the recipient
country or seriously undermine its economy, rather than
about whether it is supportive of sustainable development. Although
there was a clear prima facie case for considering the
application under Criterion Eight, we accept that the decision
to allow the licence was a "judgement call", and that
it was reached after careful and prolonged consideration. But
the controversy which surrounded it does illuminate the lack of
clarity about what Criterion Eight means in practicea lack
of clarity which is made more problematic by the fact that no
"case law" on its application has developed because
it has never been the primary reason for the refusal of a licence
application.[195]

131. We believe that the Government is serious
about its commitment to sustainable development and seeks where
appropriate to assess export licence applications carefully against
Criterion Eight. But the terms of the criterion are very hedged:
it is not about promoting sustainable development but about
the protection of sustainable development from serious
threat of its being hampered. The Tanzania case leads us to conclude
that there is confusion within the Government about the interpretation
and application of the criterion. We are concerned about the lack
of yardsticks against which serious hampering of sustainable development
could be measured in a way which could be sufficiently transparent
to give some reasonable expectation about how Criterion Eight
will bite. We also note that although the criterion has become
universally known as the "sustainable development criterion"
it also refers to the risk of "seriously undermining the
economy" of the recipient country. It is not at all clear
to us what the distinction is between these two concepts. We
recommend that the Government explain the distinction in Criterion
Eight between seriously hampering a country's sustainable development
and seriously undermining its economy, if any, in its response
to this report.

132. What is needed to prevent future controversies
such as the Tanzania case is some clarification of the meaning
of Criterion Eight, and some clear guidance as to its interpretation
and application. Neither the Consolidated Criteria nor the Export
Control Bill contain explicit definitions of sustainable development,
let alone what might be meant by its serious hampering. If the
criterion is to be applied fairly and openly, something better
is needed. The International Development Act states that

Sustainable development includes any development
that is, in the opinion of the Secretary of State [for International
Development], prudent having regard to the likelihood of its generating
lasting benefits for the population of the country or countries
in relation to which it is provided.

This would be a start, by suggesting that the hampering
of sustainable development would be anything which was imprudent
having regard to those goals, but it would be a definition which
relied heavily on the opinion of Ministers, and would still not
define what kind of actions might seriously hamper (as
opposed to just hamper) a country's sustainable development prospects.
The Secretary of State for International Development clearly considered
the proposal to purchase a military-type air traffic control system
grossly imprudent. This view appears to have been shared by the
International Civil Aviation Organisation and the World Bank.
It was clearly not shared throughout the UK Government.

133. Although the Foreign Secretary maintained that
the decision to grant the export licence in the Tanzania case
was the correct decision,[197]
he did recognise that

...we are in relatively new territory here with
the principles of sustainable development ... we are involved
in an iterative system where we are building up experience ...There
has been a lot more experience about classic defence military
criteria. There are some possible export licence applications
which do not require more than a millisecond's consideration because
it is perfectly obvious that if we have an order for arms to a
known and notable rogue state the answer to that is no and ...
where it is clear beyond any peradventure that it would be used
for internal repression far exceeding any need for maintenance
in a proper sense of law and order within human rights bounds
...At the other end, not least because it is a new area and it
is an intrinsically wider definition, there is the issue of sustainable
development and what we have to do is to carry on building on
the experience that we have had.[198]

We agree that we have to go on refining the criteria
and their interpretation. There are different individual views
on whether the decision on the Tanzania case was the right one.
As we have made clear, the decision was far from clear cut or
easy to makeand we believe the decision was made by Ministers
in good faith. However, we share with the Foreign Secretary the
view that the lessons of the Tanzania case need to be examined
and applied. We were pleased to hear that there is a Cabinet Office
Review taking place[199]
to improve and refine the processes within Government by which
Criterion Eight is interpreted and applied.

134. Coming to a clear definition of such a complex
goal as ensuring that a proposed arms export would not seriously
undermine the economy or seriously hamper the sustainable development
of the recipient country will be far from easy, but we consider
the importance of having clear criteria governing the export control
regime as justifying the effort required to produce workable guidance
on the application of Criterion Eight. We look forward to seeing
substantial progress towards formulating clear guidance as to
the interpretation and application of Criterion Eight under the
provisions of the Export Control Act. We will be examining that
guidance closely.

138. As the Government acknowledges, the new factors
to be taken into account in making licensing decisions which the
announcement indicates go wider than the circumstances of this
individual decision. We regret, therefore, that it was made by
way of a written answer, rather than by an oral statement on the
floor of the House on which the Foreign Secretary could have been
questioned and challenged. It requires careful consideration and
debate. Because of its timing, we have not had an opportunity
to examine the implications in detail with Ministers. In a letter
to the Chairman on the day the written answer was published, the
Foreign Secretary offered to provide us with further evidence,
and we intend to take up this offer at an early opportunity. At
this stage we set out some questions which appear to us to be
raised by the announcement which we can pursue after we have received
the Government's response to this report.

139. Every F-16 manufactured, wherever it is sold
to, incorporates components originating in the UK, including the
Head Up Display units. In the particular case of the F-16s intended
for export to Israel, the Government would appear to be arguing
in defence of its decision to license them for export first, with
an eye to paragraph (c) of the 8 July additional factors, that
the components form only a very small part of the aircraft, and
second, with an eye to paragraph (b) of the additional factors,
that the risks to the UK's defence relationship with the US of
breaking the contract outweigh the relative insignificance of
these components to the capability of aircraft which might be
deployed aggressively in the Occupied Territories. It appears
to us that these two criteria are likely often to conflictthe
greater the "materiality and significance" of the UK-produced
components to the end-product, the more damaging their withholding
is likely to be to any collaborative procurement project and the
more problematic a supply disruption is likely to be for the UK
Government's political and defence relationship with another country.
(Though it is not easy to identify a country other than the USA
outside the EU to which such considerations would apply.) We
conclude that if paragraphs (b) and (c) of the 8 July additional
factors were to be applied on a "case-by-case basis",
they would suggest that the more insignificant a component is
to a finished product, the more likely it is to be approved for
export, while at the same time the more significant a component
is to a finished product, the more likely it is to be approved
for export. We recommend that the Government explain more fully
these apparently conflicting considerations in its response to
this report.

140. We also detect a possible inconsistency between
the arguments the Foreign Secretary deploys in the preamble of
his announcement and the additional factors relevant to the Consolidated
Criteria which the written answer enunciates. The preamble stresses
the inter-connectedness of the modern globalised defence industry
and the importance attached to sustaining the UK's domestic strategic
industrial base, but the additional factors refer only to "the
importance of the UK's defence and security relationship with
the incorporating country". We recommend that the additional
factors are clarified to indicate whether they require Ministers
to take account in determining licence applications only of the
UK Government's defence and security relationship with the government
of the "incorporating country", or also permit Ministers
to take into account the implications of a contract for the UK's
strategic industrial base and its commercial relationships with
that country.

141. Paragraph (a) of the 8 July additional factors
refers to the effectiveness of the export control regime operated
by the "incorporating country". This is a factor already
referred to in Criterion Seven as one to be taken into account
in assessing the risk of diversion. It is not at all clear to
us what it adds in the context of the 8 July statement, since
the risk of diversion seems unlikely to be uniquely and differently
relevant in most of the circumstances which the additional factors
seem intended to address. We recommend that the Government
clarify, in its response to this report, the relevance of the
quality of export controls in the "incorporating country"
to licensing decisions relating to collaborative manufacturing
products. In his written answer the Foreign Secretary noted
that our predecessors on the Quadripartite Committee had commended
the US's export controls. However, the point at issue here is
not the effectiveness of the controls (and certainly, in
relation to prior scrutiny and end-use monitoring, there is evidence
to suggest the US system has some very positive aspects) but the
policy which those controls are used to implement. In this
particular case, the debatable point is the difference between
European and US policies towards the Israeli Defence Force's activities
in the Occupied Territories. We conclude that the comments
of our predecessors on the effectiveness of the US system
of export controls should not have been called in aid to justify
the decision of Ministers in relation to policy on the
export of aircraft components to Israel via the USA.

142. Such differences of policy have to be taken
into account by Ministers if the integrity of the export control
system is to be maintained. Paragraph (e) of the 8 July additional
factors refers to the consideration to be given to "the standing
of the entity to which the goods are to be exported". It
is not entirely clear whether this means the "incorporating
country" or the proposed final purchaser of the assembled
equipment. If we assume it is the latter, this is a reassuring
indication that the UK will not licence for export components
regardless of whether the "incorporating country" follows
UK policy on exports in relation to the proposed end-user.
This seems to heighten the apparent irrelevance of the factor
relating to export controls in the incorporating country. However,
it also seems to suggest a lower weight will be given to the UK's
judgement on the record of the ultimate end-user in these circumstances
than would have been the case were the export to have been directly
from the UK. It is not a factor used directly in the Foreign Secretary's
answer of 8 July as a justification for agreeing to a licence
for exports which would finally arrive in Israel. We recommend
that the implications of paragraph (e) of the additional factors
of 8 July are spelled out in greater detail in the Government's
response to this report.

143. In that context, we also note that our predecessors'
comments on the quality of the USA's export control system were
made in the context of their urging that every opportunity should
be taken to press the USA to align itself with the EU Code.[201]
They went on to

say

A visibly coordinated approach between the USA
and Europe would present a powerful message to those arms exporting
nations not within the consensus. We remain of the opinion that
there would be value in an internationally harmonised system of
conventional arms export policies to be followed by the major
arms exporters.[202]

We conclude that the Government's announcement
of 8 July has made it more urgent that efforts be redoubled to
seek to secure harmonisation of EU and US policies on arms exports.

144. Although the Consolidated Criteria (and their
precursors) have always applied to components as well as to assembled
equipment, it is true, as the Government points out in the statement
of 8 July, that they do not specifically and in exact terms refer
to the problem of incorporation of components in equipment for
onward export from the receiving countryalthough this is
certainly not a phenomenon that has only arisen since the Code
was agreed, and the apparent loophole has never before been identified
as such. The Government's statement of 8 July claims that there
is no common EU-wide policy about licensing strategic exports
where it is understood that the goods are to be incorporated in
products for onward export. Whether or not this is an interpretation
of the terms of the Code with which our European partners would
all agree, we recommend that the Government, in its response to
this report, sets out its view on the compatibility of the new
factors announced on 8 July with the EU Code, and indicates what
steps it intends to take to secure an EU-wide policy, or amendment
to the Code, in respect of licence applications for goods where
it is understood that the goods are to be incorporated into products
for onward export.

145. The Foreign Secretary explained the introduction
of additional factors to be weighed alongside the Consolidated
Criteria announced on 8 July as an attempt to get to grips with
the trans-national nature of the contemporary defence manufacturing
industry. Although this problem has undoubtedly been exacerbated
by changes in the structure of European and US defence manufacturing
firms in recent years, it is not a new issue. We recognise
the issue the Foreign Secretary was seeking to address in his
announcement of 8 Julythe challenge faced by the UK defence
manufacturing industry in securing participation in and sustaining
collaborative procurement projects, particularly those involving
the USAbut we conclude that in his statement he identified
a dilemma without doing enough to illuminate how it is to be resolved
in future cases. We have outlined above a number of concerns we
have about the impact of the additional factors which are now
to be taken into account in certain licensing decisions on the
integrity of the UK's and the EU's export control regimein
particular about whether exports which would otherwise breach
the first four of the Consolidated Criteria (and therefore the
EU Code of Conduct) will now be licensed if they are to arrive
in a destination via a third country rather than directly from
the UK. We will be pursuing these concerns with the Government
when we have received its response to this report.

146. We recognise that the Government was prepared
in this case to reveal at least some details of a controversial
decision as soon as it was taken, rather than standing on the
supposed convention that such information would be disclosed only
in the Annual Reports (up to eighteen months after decisions have
been made). We acknowledge that the Government, by announcing
publicly (albeit after a decision on different terms had been
taken) these new factors to be taken into account in licensing
decisions, has provided some opportunity for prospective as well
as retrospective debate on its effect on the application of the
Consolidated Criteria. We recommend that the Government's Annual
Report for 2002 identify the number, destination and types of
goods covered by licences where in decisions to allow the export
the additional factors announced on 8 July played a part.

147. We are not wholly convinced that, in making
his statement on 8 July, the Foreign Secretary fully met his own
standard of not applying any unannounced criteria to licensing
decisions. Nonetheless, taken together with his readiness to release
information on licences relating to India and Pakistan, and to
Tanzania, we do detect a move towards greater openness and a willingness
to expose controversial judgements to examination and debatebut
still too late for Parliament to express any view on such decisions
before they have been taken. We conclude that several of the
cases we have focussed on in this report starkly illuminate many
of the shortcomings of retrospective scrutiny of licensing decisions.
It is to the subject of prior scrutiny that we now return.